Friday, 29 September 2017

On the Nature of Wealth

In my mailbox the other day there was a flyer from Save the Children, a charity whose work for all I know is admirable and successful in improving the lives of poor families in the world's most destitute areas. The flyer discussed a certain failed sub-Saharan country in the following way, economic illiteracy on par with Oxfam:

The Democratic Republic of Congo (DRC) is one of the world's richest countries, but with one of the poorest populations.

I bursted out laughing and then spent the rest of that evening finding some interesting numbers (BBC has reported similar things in the past). Credible statistics for countries such as DRC is an issue all in its own, but I'm gonna use what I found at the World Bank anyway to illustrate a conceptual point about the nature of wealth.

Starting off, this claim is probably false even at face value. That a country like DRC, whose GDP is something like 1.4% of what the U.K's (with a slightly larger population), should be "one of the world's richest" is somewhat preposterous. Presumably, what they were getting at was a calculation of the following kind:

<total known stock of diamonds, oil and metals in the ground>

*

<relative world market price for those commodities>

Even so, I seriously doubt that such an imaginary number would equal the combined net worth of all American or British or German households and business. But let's pretend it does. Is it wealth?

Wealth measures the value of all the assets of worth owned by a person, community, company or country. Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts. Essentially, wealth is the accumulation of resources. Specific people, organizations and nations are said to be wealthy when they are able to accumulate many valuable resources or goods. (emphasis added)

There are a couple of things to note here. First, as becomes clear in January every year when the conspiracy think tank Oxfam attempts to scare us with some Big Wealth Inequality Number, subtracting debt from assets may be misleading: because of the temporal divide within a person's personal finances, it usually pays off to take on debt early in one's career to pay off against (higher and more secure) future earnings. Therefore demographics and proportion of, say, students taking out debt affects the analysis – in Oxfam's survey seriously exaggerating the wealth inequality statistics.

Second, the Market Value over some resource is what really matters –not the sheer accumulation of resources. In other words: price matters more than physical quantity. Now, most people misinterpret what "resources" mean in general, which makes them draw incorrect conclusions about this as well as other topics ranging from climate change to economic processes at large.

As Mises taught us half a century ago – and Julian Simon more recently– wealth (or even 'goods' or 'commodities' or 'services') are not the physical existence of those objects somewhere in the ground, but the satisfaction and valuation derived by the human mind. The object itself is only a means to whatever end the actor has in mind. Therefore, a "resource" is not the physical oil in the ground or the tons of iron ore in the Australian outback, but the ability of Human Imagination and Ingenuity to use those for his or her goals. After all, before humans learned to harnish the beautiful power of oil into heat, combustion engines and industrial production, it was nothing but a slimy, goe-y liquid in the ground, annoying our farmers. Nothing about its physical appearance changed over the centuries, but the mental abilities and industrial knowledge of human beings to use it for our purposes did.

Same thing applies with the innumerable sources of diamonds and oil and precious metals in the DRC: they are only "valuable" insofar as they can a) be extracted, b) be transported to producers and consumers willing to give up other objects for them. Now, I know next to nothing about the DRC, but I assume there are certain issues with both (a) and (b), namely: conflict. Lack of property rights. Big mining equipments are expensive, and before you'd be willing to set them up and start extracting these "resources" you want to be reasonably convinced that they won't be confiscated the next day –or destoyed by some enemy tribe. And that's assuming you could even access the physical location without getting shot or blown up. Even if by some miracle youcould overcome these problems, there are sure to be some fighting groups expropriating whatever you may successfully extract from the ground. Which is why very few sane companies are around, and why most of those "resources" remain firmly in the ground.

After all, what makes the Australian iron ore so valuable is that property rights over equipment and sources are secure, that extraction can occur peacefully and predictably, and that transportation routes and functioning price systems are established for the dirt digging. Ie, the services derived from using iron ore is much easier to obtain, compared to the uncertain, dangerous and probably unsuccessful ways of getting similar services from precious metals in the DRC.

Before the Democratic Republic of Congo learns to respect private property and embrace capitalism, whatever is found in its ground is nothing but pretty-coloured rocks with next-to-no value at all. It is understandable that economically illiterate charity organisation don't kown better. But if they really want to improve the world, they would do well to listen.

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About Me

I'm a passionate student of Economics and Economic History, recently graduated First Class from the University of Glasgow. In 2017-2018 I'm pursuing graduate studies at the University of Oxford.
I love food, yoga, travelling, reading and arguing over economic issues - today and in the past. Enjoy!